Before the bell: what to expect from the 2025 stock market

Strategists continue to guide investors toward Wall Street, but between the lines, opportunities in European and Chinese equities are also highlighted.

Forward look: what to expect from the 2025 stock market

The American economic engine is expected to keep running strong in 2025, providing some lift to the sluggish European economy. Much of the anticipated growth in Europe hinges on multiple rate cuts by the ECB. Economic growth in Europe is expected to rise from 0.8% to 1.3%, while the US is projected to grow by 2.4%, reflecting a slight slowdown. Despite this, the dominant advice from strategists is to stick with Wall Street and big tech companies in 2025. They argue that the Magnificent Seven are not overly expensive at a valuation of 30 times expected earnings.

Fund managers are kicking off 2025 with portfolios heavily skewed toward US equities. Still, they aren’t entirely dismissive of European stocks, mainly due to their low valuations. Major European stocks trade at just 13 times expected earnings, nearly half the valuation of the S&P 500 (P/E ratio of 22). However, fund managers prefer the pricier US market, driven by IT and AI sectors.

The focus will naturally be on corporate earnings growth. Analysts forecast 20% earnings growth for US big tech stocks, compared to 12% for the rest of the S&P 500. For European companies, growth expectations range between 5% and 10%.
Few economists foresee a dramatic rebound in China’s economy, but Bank of America notes that “Chinese equities are too cheap to ignore.” Emerging markets, however, lack excitement, partly due to a strong dollar. Developing economies typically struggle with a robust dollar because much of their debt is dollar-denominated.

Rates and bonds

The US 10-year Treasury yield ended 2024 at approximately 4.6%. Few expect it to fall further. While the Federal Reserve is expected to cut rates twice by 25 basis points, this is unlikely to impact long-term yields. Concerns linger that inflation could rise under Trump’s second administration.

Europe begins the year with much lower rates than the US. Analysts foresee significant further rate cuts here. The ECB has already lowered its rate to 3%, and some predict the eurozone deposit rate could drop to just 1.5% by the end of 2025.

Interestingly, most market strategists recommend allocating part of your portfolio to bonds. While yields aren’t extravagant, they are sufficient to offset inflation and provide modest returns. High-quality corporate bonds currently offer about 100 basis points more than German government bonds. Strategists are optimistic about 2025 but caution that Wall Street’s high valuations increase the risk of negative market reactions.

What about Donald Trump II?

The greatest uncertainty revolves around Trump’s policies starting January 20. His election sparked enthusiasm in US markets, while European equities lagged behind. In the US, investors are banking on tax cuts and deregulation, though they seem skeptical that Trump will enforce strict immigration policies or significantly hike tariffs. Such actions could notably boost US inflation, a key risk cited by strategists for 2025, alongside other potential policy pitfalls.

Revisiting European equities

JP Morgan strategists recommend US growth stocks but European equities for income. Many European stocks are attractively priced and offer robust dividend yields.

Real estate remains attractive

This leads us to real estate equities, a strong point for the Brussels stock exchange. Here, we focus on Regulated Real Estate Companies (REITs) rather than developers. REITs have seen their stock prices decline for three consecutive years, with some halving in value or more. Despite this, most REITs have maintained stable results, often hedging their debt against rising rates for years. Some have reduced debt as lower property valuations have pressured portfolios. However, if rates fall this year, a positive reversal could occur. Belgian REITs offer dividend yields ranging from 6% to over 10%, with little risk of dividend cuts. The three largest REITs are listed in the Bel20: WDP (logistics real estate), Aedifica, and Cofinimmo (nursing homes). Other notable names include Ascencio (retail), Home Invest (residential), Montea (logistics), Warehouse Estates (logistics), Retail Estates, QRF, and Wereldhave Belgium (all retail real estate).

Forecasts are rarely perfect

At the end of 2023, skepticism loomed over 2024. Investors feared a slowing economy or even a recession, with rate cuts from central banks coming too late. Those fears proved unfounded. Today, optimism abounds, especially regarding the US economy. Will this optimism be misplaced again? Let’s check back at the end of 2025.

Did you know…

as of today, January 2, Vastned Belgium and Vastned Netherlands have officially merged into a single stock with its primary listing in Brussels. This move underscores the success of the Regulated Real Estate Company structure and cements Brussels as a hub for real estate stocks.

This article was translated from Dutch and was originally published on Spaarvarkens.be.